Value Chain Analysis
What is the value chain?
The value that's created and captured by a company is the profit margin:
Value Created and Captured – Cost of Creating that Value = Margin
The more value an organization creates, the more profitable it is likely to be. And when you
provide more value to your customers, you build competitive advantage.
Understanding how your company creates value, and looking for ways to add more value, are
critical elements in developing a competitive strategy.
Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on
systems, and how inputs are changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all businesses, and he divided them
into primary and support activities.
Primary Activities
Activities in the value chain that are performed to create, market, and deliver products and
services to customers and provide post-delivery service and support. Primary activities include
production, shipping and receiving, and marketing.
Inbound Logistics
Inbound logistics include the receiving, warehousing, and inventory control of a company's raw
materials. This also covers all relationships with suppliers. For example, for an e-commerce
company, inbound logistics would be the receiving and storing of products from a manufacturer
that it plans to sell.4
Operations
Operations include procedures for converting raw materials into a finished product or service.
This includes changing all inputs to ready them as outputs. In the above e-commerce example,
this would include adding labels or branding or packaging several products as a bundle to add
value to the product.5
Outbound Logistics
All activities to distribute a final product to a consumer are considered outbound logistics. This
includes delivery of the product but also includes storage and distribution systems and can be
external or internal. For the e-commerce company above, this includes storing products for
shipping and the actual shipping of said products. 5
Marketing and Sales
Strategies to enhance visibility and target appropriate customers—such as advertising,
promotion, and pricing—are included in marketing and sales. Basically, these is all activities
that help convince a consumer to purchase a company’s product or service. Continuing with the
above example, an e-commerce company may run ads on Instagram or build an email list for
email marketing.5
Services
This includes activities to maintain products and enhance consumer experience—customer
service, maintenance, repair, refund, and exchange. For an e-commerce company, this could
include repairs or replacements, or a warranty.5
Support Activities
Now, companies can further improve the primary activities of their value chain with secondary
activities. Value chain support activities do just that, they support the primary activities. The
support, or secondary, activity generally plays a role in each primary activity. 6
Such as human resource management, which can play a role in operations, marketing, and sales.
Here are the four supporting activities.
Procurement
Procurement is the acquisition of inputs, or resources, for the firm. This is how a company
obtains raw materials, thus, it includes finding and negotiating prices with suppliers and
vendors. This relates heavily to the inbound logistics primary activity, where an e-commerce
company would look to procure materials or goods for resale. 7
Human Resource Management
Hiring and retaining employees who will fulfill business strategy, as well as help design,
market, and sell the product. Overall, managing employees is useful for all primary activities,
where employees and effective hiring are needed for marketing, logistics, and operations,
among others.8
Infrastructure
Infrastructure covers a company's support systems and the functions that allow it to maintain
operations. This includes all accounting, legal, and administrative functions. A solid
infrastructure is necessary for all primary functions. 9
Technological Development
Technological development is used during research and development and can include designing
and developing manufacturing techniques and automating processes. This includes equipment,
hardware, software, procedures, and technical knowledge. Overall, a business working to reduce
technology costs, such as shifting from a hardware storage system to the cloud, is technological
development.
Benefits of Value Chain Analysis
1. Improved Bids and Proposals: Effective VCM improves your ability to capture, track
and manage customer and marketing requirements to better estimate design, planning,
procurement, production and service activities for more accurate cost estimates — all
with complete traceability.
2. Better Product Planning, Research, and Development: Good VCM includes
developing a cross-functional team approach to planning, developing, delivering and
servicing products focused on program performance, cost reduction and product quality.
This enables you to more effectively plan and implement simultaneous projects while
managing resource allocation, costs, scheduling and deliverables more efficiently.
3. Standardized Processes: VCM calls for repeatable and measurable business processes to
better manage the product master data to ensure that customer expectations and
commitments are met. Active VCM enables release and change processes to be better
managed from concept to implementation. Standard, reliable and repeatable processes
contribute significantly to reducing overall operational inefficiencies and waste.
4. Improved Vendor Management: Synchronizing design and sourcing teams with
vendors ensures that outsourced components and subsystems are managed to meet
performance, quality, schedule and cost requirements while avoiding design flaws, excess
inventory and waste.
5. Post-Sales Service and Support: Through VCM, you’re able to better manage and track
in-service product configuration changes coordinated among field service, customer
support and engineering resources.
6. Reduced Costs: Optimizing all the value chain components listed above can result in
substantial end-to-end cost savings from streamlined processes, reduced inefficiencies
and waste, better inventory control and improved product quality.
7. Improved Profitability: The ultimate result of a comprehensive and robust VCM
program is enhanced revenues and better profit margins, contributing to greater overall
success.
Steps to develop VCA
Step 1: Identify all value chain activities
Identify each activity that plays a part in creating your company’s finished product. For example,
it’s not enough to write down that you have a product design team. You need to dig deeper and
ask:
How many designers are on that team?
How much time does each activity on that team require?
What raw materials are they using?
Once you’ve identified each primary activity in detail, you’ll need to do the same for each
support activity.
Pro-tip: This step will take a considerable amount of time and, if possible, shouldn’t be a one-
person task. Instead, encourage cross-collaboration internally so each department can outline its
logistics, operational costs and services. A task management app like Asana or Trello can keep
each activity organized and create a visual chart while you identify each activity in your value
chain.
Step 2: Calculate each value chain activity's cost
Remember to calculate cost drivers such as rent, utilities and staff. By having an accurate picture
of every single cost (and what activities increase or decrease costs), it’s easier to see how much
revenue you’re actually generating. Once each activity has been mapped out, you can delineate
which parts of your value chain are costing your business the most money.
Step 3: Look at what your customers perceive as value
Know that customers tie value directly to a product’s price tag, in other words, perception greatly
impacts product margins. To determine what your end customers perceive as valuable, you need
to dig into their psychology. Collecting quantitative and qualitative data can help you identify
statistical patterns in your customer’s buying behavior.
Identifying these qualities will also help your sales reps down the line with prospecting and
qualifying ideal customers. Understanding why and how your customers make purchasing
decisions boils down to understanding their intent and what they perceive as valuable.
People often make decisions based on actions that their friends, family and close social groups
take. For example, if people in your social circles start to buy noise-canceling headphones to
wear at work, you may begin to think of them as valuable, even if you didn't want to buy them
before.
Knowing what your customers, and their social circles, desire opens up the opportunity to market
your product in a way that motivates them to buy it.
Step 4: Look at your competitors’ value chains
The best way to determine value is through market analysis. Although it’s unlikely you will have
access to your competitors’ infrastructure and operational breakdowns, you can use benchmarks
as a starting point. This process is called competitive benchmarking.
You can choose to use competitive benchmarking in one of three main ways:
Process benchmarking: Comparing your process structure and operations against how
your competitors carry out tasks.
Strategic benchmarking: Comparing your high-level business strategy to your
competitors’ to determine what emulates success.
Performance benchmarking: Comparing outcomes, such as revenue, organic traffic,
social media performance, reviews, and ratings and so on.
First, you need to determine your competitive benchmarking goals; then, you can conduct
research, make a comparison, and determine value.
Step 5: Decide on a competitive advantage
At this stage, you will have a clear understanding of your internal costs, what changes you can
make and how they stack up to your competitors.
If you choose cost advantage, you need to find a way to optimize and cut the cost of primary and
support activities in your value chain. You might choose to outsource talent, replace certain
human activities with automation or look for cheaper delivery services or distribution channels.
As more and more people start working remotely, you may even get rid of office space.
Any cost cuts you make in the chain can lower the cost of your final product. The more you can
push your product prices down, the larger your cost advantage will be compared to competitors.
If you choose competitive differentiation, you must capitalize on increasing the value perception
of those products that your customers and end users are most willing to pay for. You can cater to
your customers’ most basic desires and needs by recognizing their pain points and repositioning
your products as the ultimate solution.
For example, your sales team can highlight your product differentiation during the sales pitch or
closing stage in the pipeline by:
Mentioning the unique benefits your product has that your competitors’ products don’t
Presenting a case study from a customer that reinforces your position and highlighting
relevant data or ROI
Listing other businesses in the prospect’s industry that have used your product or service
and had a positive experience
Information Technology Changes the Way You Compete
As it moves from a strictly supporting role in the back office, computer-based technology offers
new competitive opportunities. A company can use this technology, for example, to build a
barrier to entry, to build in switching costs, and even, sometimes, to completely change the basis
of competition.
Through this we need to show some companies have seized the advantage, while others, more
complacent, have ended up playing the difficult and expensive game of catch-up ball. Therefore,
it is important for executives to make this competitive analysis in assessing where IS fits in their
companies, since in some cases it appropriately plays a support role and can add only modestly
to the value of a company’s products, while in other settings it is at the core of their competitive
survival. Understanding where a company fits on this spectrum can help the CEO determine both
the proper level of expenditures and the proper management structure for IS.
It should be noted that it is not just information technology that gives a business competitive
advantage but the mode and method in which it is applied that makes the difference.
Thus, you must use information technology in an innovative way if you would want to make a
difference in your business. Using information technology to solve problems in the same way
and manner as your competitors will not lead you to achieve competitive advantage.
A business needs to use the technology that is available at its disposal to create something that is
not only unique but something that their competitors do not have. To unravel your competitive
advantage, you should ask yourself these three important questions.
1. What can your business be the first at?
2. What is that unique thing only your business can offer
3. What can your business be the best at?
Any one of the above questions should be able to give you an idea of your competitive
advantage. Once you can identify it, you must be able to communicate it to your employees and
your customers.
Lowering the cost : Cost reduction through IT is business strategies where most of the
organization used to reduce cost of products or services provide and increase profit. In 2014, the
air Asia CEO reveal the company business plan that the airline will more attention on reducing
the cost in order to improve the profitability. Therefore, so many changes were done to archive
organization goal include the implementation of automation of check-in procedure, in other
hand, number of staffs who are manually performed check-in have been reduces. Furthermore,
the company goal is to lower the overall cost by 7.5 % in 2014 and they really archive that, they
manage to reduce the cost by 2.5% within the first two month. Therefore, while Air-Asia
improving efficiency of their operation, they manage to obtain competitive advantage over other
airlines by reducing the cost of operations as well as cost for customers that lead to stay in top in
business market.
Enhancing differentiation: information technology also comes in handy in the differentiation of
produces through customization of the product. This further differentiates a business and its
products from what its competitors have on ground.
Creating new business
The implementation of information technology can help to give rise to new areas of business. It
can make businesses that were seemingly impossible in the past to be feasible now. It can also
create new businesses within old ones.
Customer Lock-In Through IT
This is a business strategy whereby a company uses Information technology techniques to retain
their already existing customers in order to achieve competitive advantage. Customer lock-in is a
business strategy that has enabled industry leaders such as Amazon, Apple, Microsoft, Rolls
Royce to retain their customers and outcompete their competitors by utilizing Information
technology techniques. For Instance, Mobile technology companies like Apple and Android
devices use the concept of ‘Data trap’ to lock-in their customers. Both companies host content
and applications on their marketplaces like the AppStore and Google Play Store that can’t be
transferred elsewhere. Hence, to switch from one mobile technology to another, one would have
to give up their purchased apps, movies and music tracks. Due to this reason, many customers
prefer to use only one between Apple and Android phones as it is inconvenient to switch from
one to the other.
